Tag Archives: supreme court

Default sentence reduction for part payment

Supreme Court logoOn 24 January 2018 the UK Supreme Court handed down its judgment in R (Gibson) v Secretary of State for Justice [2018] UKSC 2. As a result of this judgment there will be slightly more generous reductions in default sentences to be served where part of the amount due under a confiscation order has been paid. It may be that in its determination of what the statute law actually says the Supreme Court has found that the law in this area is more generous to convicted defendants than parliament had intended it to be.

 

Mr Gibson’s case

Mr Gibson had been made subject to a confiscation order of over £5.4m in March 2000.  He was ordered to pay this within 12 months, with a six year prison term in default.  Perhaps not surprisingly Mr Gibson did not pay the amount in full on time and from March 2001 interest started to be added, at the rate of 8% per annum, on the amount outstanding.

In fact only relatively small amounts were paid under the confiscation order.  By the time the Magistrates’ Court committed Mr Gibson to prison under the default sentence only £90,370 in total had been paid – but the interest added to the amount originally ordered to be paid had resulted in the total amount outstanding rising to over £8.1m.

The original default term had been six years, or 2,190 days.  There was no doubt that Mr Gibson was due some reduction in this because he had paid £90,370 off the order.  But should the reduction be calculated as a proportion of the original amount ordered of £5.4m or as a proportion of the amount now outstanding of £8.1m?

Originally the calculation was made based on the £8.1m.  That resulted in a reduction of 24 days in the default term.  But Mr Gibson wanted the calculation to be based only on the original £5.4m – which instead would result in a reduction of 35 days.  Mr Gibson commenced legal proceedings to get the extra reduction in his default sentence.

The law on the point is not particularly clear.  Mr Gibson originally lost the argument in the Administrative Court.  He appealed to the Court of Appeal – and lost again.  But in January 2018 the Supreme Court decided in Mr Gibson’s favour.  As a result he is entitled to the extra 11 days reduction in his default sentence.

 

The effect of the Supreme Court decision

This decision applies in every case (in England and Wales) in which a default sentence has been activated by the Magistrates’ Court, interest has been added to the amount outstanding, and there needs to be some reduction in the default sentence as a result of part of the confiscation order having been paid.

The effect of the decision is that the reduction for the part payment is to be calculated based on the original amount ordered to be paid when the confiscation order was made – not on the amount (including interest) which is outstanding when the Magistrates’ Court activates the default sentence.

Let’s take a simpler example. John is subject to a confiscation order in the sum of £150,000 with a default sentence of 30 months. He has paid £15,000 under the order, but interest of £5,000 has been added. When John is being committed to prison under the default sentence the balance outstanding is £140,000 (including the interest).

John’s default term will be reduced by 3 months (which is 10% of the original default term) because he has paid £15,000 (which is 10% of the original confiscation order amount of £150,000).  So he will be committed to prison for 27 months (3 months less than the original default term of 30 months).  In practice the default sentence would be calculated in days rather than months.

When calculating the reduction in the default sentence the interest is ignored.

 

Is this what parliament intended?

It seems doubtful that this is what parliament intended.  One effect of this decision appears to be that a default sentence cannot be activated where the remaining balance outstanding is less than the total interest which has been added.

Consider the example of Peter who was originally the subject of a confiscation order for £60,000 with a default sentence of 18 months.  Peter does not pay on time and interest of £5,000 has been added.  The amount outstanding is now £65,000 – but if Peter pays just the original £60,000 off then he cannot be committed to prison under the default sentence, even though the £5,000 interest is still outstanding.  This is because there is a 100% reduction in the default sentence because he has paid 100% of the original amount of the confiscation order.

Of course parliament can change the law by passing new legislation if it wishes.

 

Contacting us

Our contact details are here.

David

(Note: This article applies to confiscation proceedings under the provisions of Part 2 of the Proceeds of Crime Act 2002 in England and Wales. There are a number of additional issues which could be relevant to a defendant’s confiscation proceedings in particular cases which it is not possible to deal with in a relatively short article such as this. Appropriate professional advice should be sought in each individual case.)

The meaning of “dishonesty” in English criminal law

Legal wig copyright David Winch 2014
What is meant by “dishonesty” in English criminal law? When considering the meaning of dishonesty the criminal courts of England and Wales until now often referred to a case decided last century. Recently in the case of Ivey v Genting Casinos (UK) Ltd (t/a Crockfords) [2017] UKSC 67 (25 October 2017) the UK Supreme Court reconsidered the meaning of dishonesty – and came to some new conclusions.

 

The two-stage ‘Ghosh’ test

Until October 2017 the leading case on the meaning of dishonesty in English criminal law was R v Ghosh [1982] EWCA Crim 2. In that case, decided in 1982, the Court of Appeal determined that there was a two-stage test for dishonesty. The first stage was based on an objective criterion and the second stage was based on a subjective criterion. The two stage test was put in the following terms:-

“In determining whether the prosecution has proved that the defendant was acting dishonestly, a jury must first of all decide whether according to the ordinary standards of reasonable and honest people what was done was dishonest. If it was not dishonest by those standards, that is the end of the matter and the prosecution fails.

If it was dishonest by those standards, then the jury must consider whether the defendant himself must have realised that what he was doing was by those standards dishonest. In most cases, where the actions are obviously dishonest by ordinary standards, there will be no doubt about it. It will be obvious that the defendant himself knew that he was acting dishonestly. It is dishonest for a defendant to act in a way which he knows ordinary people consider to be dishonest, even if he asserts or genuinely believes that he is morally justified in acting as he did.”

So until October 2017 criminal courts operated on the basis that not only must the conduct of the defendant be dishonest by the ordinary standards of reasonable and honest people (the objective test) but the defendant himself must have realised that he was acting dishonestly by that standard (the subjective test).

 

The subjective test

What was implied in Ghosh, was that a defendant was entitled to say, “I did not know that anybody would regard what I was doing as dishonest” and if he was believed he should be acquitted of dishonesty (as the subjective test was not satisfied).

But the Supreme Court has now criticised that approach, saying that “It has the unintended effect that the more warped the defendant’s standards of honesty are, the less likely it is that he will be convicted of dishonest behaviour”.

The new judgment means that it is still necessary for the jury in the Crown Court or the magistrates in the Magistrates’ Court to reach conclusions about the actual state of mind of the defendant – but only insofar as this relates to the defendant’s state of knowledge or belief as to the facts.  The Supreme Court has now said that criminal courts should no longer ask themselves whether the defendant himself realised that he was acting in a way which ordinary people would consider to be dishonest.

 

The new legal position

So instead of the Ghosh test, when dishonesty is in question the court must first ascertain (subjectively) the actual state of the individual’s knowledge or belief as to the facts. The question is not whether that belief is reasonable – the question is whether it is genuinely held.  Once his actual state of mind as to knowledge or belief as to the facts is established, the question whether his conduct was honest or dishonest is to be determined by the jury or magistrates by applying the (objective) standards of ordinary decent people.

There is no longer any requirement that the defendant must appreciate that what he has done is, by those standards, dishonest.

One consequence of this is that the definition of “dishonesty” is now consistent between criminal and civil law in England and Wales.

 

An example

Suppose a person is newly arrived in England and he has come from a country in which all public transport is free.  He gets on a bus in London and on arriving at his destination gets off without paying.  He is charged under s3 Theft Act 1978 with dishonestly making off without payment.  But was he dishonest?

The issue is ‘Did he genuinely believe that no payment was required?’.  If he did then he has not been dishonest and should be acquitted.  If, on the other hand, he did know that payment was required then he was dishonest by not paying.

But this issue concerns the defendant’s belief about the relevant facts – the issue is not about his understanding of what constitutes “dishonesty”.  That is the change in the law as a result of the Supreme Court’s ruling in October 2017.

 

Contacting us

Our contact details are here.

David

(Note: This article applies to matters arising under the provisions of the criminal law in England and Wales.  Appropriate professional advice should be sought in each individual case.)

Challenging a s22 PoCA 2002 confiscation reconsideration

Crown Court judgeThe revisiting of old confiscation orders by prosecutors under section 22 Proceeds of Crime Act 2002 is becoming more frequent.

This blog post considers the provisions of s22 and ways in which prosecution applications under s22 may be challenged by the defendant.

Section 22 is headed “Order made: reconsideration of available amount”.

WARNING – THIS IS A LENGTHY BLOG POST – APPROXIMATELY 3,000 WORDS

  1. Reconsideration of available amount
  2. The legal ‘trigger’
  3. “Makes” v “varies”
  4. Inflation
  5. The burden of proof
  6. What is ‘just’?
  7. The prosecutor’s s22 application and witness statement
  8. Restraint orders and investigation powers
  9. Time limit
  10. Challenges
  11. Default sentence
  12. Due date for payment & interest
  13. Second revisit
  14. Appeals
  15. Conclusion
  16. Contacting us

 

Reconsideration of available amount

Section 22 PoCA 2002 empowers the Crown Court to vary an existing confiscation order made under s6 of the Act.  In effect it allows the prosecution to apply to the court for a further payment to be required from the defendant under an existing confiscation order where his available amount has increased since the original order was made.

This blog article does not consider variations to confiscation orders made under earlier legislation, such as the Criminal Justice Act 1988, Drug Trafficking Act 1994 or Drug Trafficking Offences Act 1986.  Different rules apply under those Acts.

Nor are we considering the position of a person who has a new conviction and a new confiscation order is being made as a result of that.

We are considering the situation of a defendant who was made subject to a confiscation order, perhaps some years ago, at which time the court ruled that he had a figure of benefit which was higher than his available amount.  At that time the court would not have ordered him to pay the full amount of his benefit.  Instead the amount he was then ordered to pay would have been restricted to his available amount at that time.  The figures of the defendant’s benefit, available amount and the amount he was ordered to pay should all be spelled out in the original confiscation order.

Under s22 the prosecutor asks the court to consider the available amount which the defendant has now and to order him to pay a further amount now towards his total benefit.

Let’s consider Jim’s case.  Jim was subject to a confiscation order in September 2008.  That order says that Jim’s benefit was £100,000 and his available amount was £500.  Jim was ordered to pay £500 which he has paid.  Today Jim owns a house with his wife.  The house is worth £200,000 but there is a mortgage of £180,000.  So Jim’s half share is worth £10,000.  Jim also has a car worth £6,000 but no other assets, so Jim’s total available amount today is £16,000.

The prosecution can ask the court under s22 to order Jim to pay a further £16,000 (or some other figure) by making a variation to the confiscation order made in September 2008, requiring a further payment now.

 

The legal ‘trigger’

The legal ‘trigger’ for a s22 variation is in subsection 22(4):-

If the amount found under the new calculation exceeds the relevant amount the court may vary the order by substituting for the amount required to be paid such amount as –

(a) it believes is just, but

(b) does not exceed the amount found as the defendant’s benefit from the conduct concerned“.

The ‘trigger’ is in the first phrase – “If the amount found under the new calculation exceeds the relevant amount“.  What that means is that a s22 variation can only be made where the defendant’s available amount now exceeds the available amount shown on the original confiscation order.

In Jim’s case it obviously does (£16,000 is more than £500) and so the court can consider making an order requiring a further payment from Jim now.

 

“Makes” v “varies”

Under s22 a court may “vary” an existing confiscation order – but it does not “make” a confiscation order.  The legislation does not regard a variation to amount to the ‘making’ of an order.  This can be seen most clearly in the differing provisions regarding default sentence when a court “makes” an order – see s35 – and when a court “varies” an order – see s39.

It follows that an order which has been varied under s22 is an order which was ‘made’ at the time of the original confiscation hearing, not at the time of the variation.

 

Inflation

In these cases we can be looking back at figures determined by the court some years ago.  Because of this s22 recognises the effect of inflation by subsection 22(7) which says:-

In deciding under this section whether one amount exceeds another the court must take account of any change in the value of money.

This is done by using the RPIJ index published by the Office for National Statistics.  [UPDATE: Since the article was written courts have moved on to using CPIH rather than RPIJ for ‘inflation’ uplifts.]

In Jim’s case the confiscation order was made in September 2008 when RPIJ stood at 209.8.  The latest figure (May 2016) is 240.1.

So uplifting Jim’s benefit of £100,000 it becomes equivalent to £114,442 and his original available amount of £500 becomes equivalent to £572 today.

So, strictly speaking, the trigger condition is whether £16,000 exceeds £572 – which of course it does.

The prosecutor will most likely ask the court to vary the original confiscation order so that Jim’s amount to pay is £16,500 – that is the £500 which he has already paid plus a further £16,000 payable now.

The prosecutor will point out that this amount (which when adjusted for changes in the value of money is equivalent to £16,572) is less than Jim’s total benefit (which when adjusted for changes in the value of money is £114,442).

 

The burden of proof

An application under s22 is made by the prosecutor (or an enforcement receiver appointed under s50).  It would appear that the burden of proof is on the applicant to provide information enabling the court to make a “new calculation” of the defendant’s available amount.

This contrasts with the position when the confiscation order was originally made (at which time the burden was on the defendant to show that his available amount was less than his benefit, by virtue of s7).

 

What is ‘just’?

Under s22(4) the court is to vary the amount to be paid to an amount which the court “believes is just.”  What does that mean?

I suggest that part of the process of deciding what is ‘just’ involves looking back at the figure of benefit previously decided by the court and considering whether that figure, in the light of subsequent legal developments, is either faulty because it was based on a misunderstanding of the law (as may have arisen, for example, in a case of mortgage fraud), or is an amount which it would now be considered disproportionate to order the defendant to pay in full (as may be the case, for example, where stolen property has been returned to its owner).

That will involve some detailed reconsideration of the basis on which the original confiscation order was made, which may involve re-examination of the basis of prosecution’s assertions regarding benefit which were set out in the original s16 statement insofar as the court accepted those assertions when making the confiscation order.

Where, in the light of the relevant law as it is understood today, the defendant would not now be ordered to pay an amount based on the whole of the benefit shown in the original confiscation order then, I suggest, it would not be ‘just’ to order a defendant to pay that amount now under s22.

So it is necessary, in my view, to consider the impact of case law such as R v Waya [2012] UKSC 51 (proportionality and confiscation, mortgage fraud), R v Ahmad [2014] UKSC 36  (recovery from co-defendants), R v Harvey [2015] UKSC 73 (VAT and confiscation) and Boyle Transport (Northern Ireland) Ltd v R [2016] EWCA Crim 19 (piercing the corporate veil) on the understanding of confiscation law, when considering an application under s22.

This does not mean that the defendant is appealing against the benefit figure in the original confiscation order.  He is asking the court to consider what it would be ‘just’ for him to be ordered to pay now under s22.

[UPDATE: The case of R v Cole [2018] EWCA Crim 888 (24 April 2018) in the Court of Appeal concerned a s22 application in a mortgage fraud case. The original confiscation order had been made before the Supreme Court decision in Waya and the benefit included the amount of the mortgage advance.  The Court of Appeal restricted the further amount ordered to be paid under s22 in line with what the original benefit figure would have been had a ‘Waya-compliant’ approach been followed when the confiscation order was first made.  In other words the Court of Appeal did take into account the decision in Waya when making the s22 variation.]

More broadly the court appears to have a discretion under s22 to consider what amount, in all the circumstances, it believes it would be ‘just’ for the defendant to be ordered to pay.

The Court of Appeal has held in the case of Padda v R [2013] EWCA Crim 2330, “In that context, it is entirely appropriate for a court to consider such matters as the amount outstanding, the additional amount which might now be available for a further payment, the length of time since the original confiscation order was made, the impact on the Defendant of any further payment contemplated and indeed any other consideration which might properly be thought to affect the justice of the case.

When the court is considering a variation to a confiscation order under s22 then – once the trigger condition has been satisfied – the court may order the defendant to pay a further amount of any size, large or small, so long as the total which the defendant is required to pay under the confiscation order (adjusted for changes in the value of money) does not exceed the total of his benefit (adjusted for changes in the value of money).

Strictly speaking, the only relevance of the defendant’s current available amount is in relation to determining whether the trigger condition is satisfied.  In practice however the prosecutor is likely to suggest that it would be just for the defendant to be ordered to pay an additional amount which is the lesser of (a) his current available amount, and (b) the maximum which the defendant could be ordered to pay in relation to his total benefit.

 

The prosecutor’s s22 application and witness statement

Section 22 does not make express provision for a prosecutor’s statement in support of an application for a variation of a confiscation order.  There are no express provisions akin to those found in s16.

Equally there are no express provisions akin to sections 17, 18 and 18A requiring statements or information from the defendant or third parties.

Nevertheless the prosecutor (or enforcement receiver) will need to make a written application to the court and the likelihood is that he will append to that a witness statement which will be in some respects similar to a s16 statement.  Rule 33.16 Criminal Procedure Rules 2015 applies to the service of the application and any supporting witness statement.  It is likely that the defendant will want to respond to the application by way of a statement of his own before the court hearing.

 

Restraint orders and investigation powers

The prosecutor is entitled to apply for a restraint order, under s40(6), when a s22 application is to be made or has been made.

Where the court makes a restraint order it may also require the subject of the restraint order to supply information under s41(7) for the purpose of ensuring that the restraint order is effective.

However it appears that the investigation powers under Part 8 of PoCA 2002 are not available to a prosecutor applying for a s22 variation, because a s22 application does not appear to involve a ‘confiscation investigation’ as defined by s341(1).

There could be some debate as to whether a s22 investigation is an investigation into “the extent or whereabouts of realisable property available for satisfying a confiscation order made” in respect of the defendant, referred to in s341(1)(c).  My own view is that “satisfying a confiscation order made” refers to full payment of the amount ordered to be paid under the original confiscation order which has been made, rather than referring to satisfying a variation of that confiscation order which is (perhaps) to be made.  If that is the case, and if the original confiscation order has been paid in full, then the s22 investigation would, in my view at least, not fall within s341(1) with the result that the Part 8 investigation powers would not be available to a financial investigator acting for the prosecutor.

[UPDATE: The recent Criminal Finances Bill includes – at clause 27 – a proposed amendment to s341(1)(c) intended to make the investigation powers of Part 8 available to a prosecutor applying for a s22 variation.]

 

Time limit

There is no statutory time limit.  This means that a s22 application may be made many years after the original confiscation order was made.

 

Challenges

A s22 application may be subject to a variety of challenges by the defendant.

The defendant may assert that the trigger condition has not been satisfied.  Take the example of Bert who was subject to a confiscation order made in February 2012.  In that order his benefit was held to be £90,000 and his available amount was £40,000.  Bert was ordered to pay £40,000 which he has paid.  The prosecutor now finds that Bert has £25,000 in a bank account in his sole name.  Bert has no other assets, so his available amount now is £25,000.

The RPIJ in February 2012 was 225.8.  The latest figure (May 2016) is 240.1.

So uplifting Bert’s benefit of £90,000 it becomes equivalent to £95,699 and his original available amount of £40,000 becomes equivalent to £42,533 today.

So, strictly speaking the trigger condition is whether £25,000 exceeds £42,533 – which of course it does not.

It follows that the trigger condition is not satisfied and the court should not order Bert to pay a further amount now under s22.

A second area of challenge concerns the defendant’s available amount.  Consider Charles who, according to Land Registry records, is the sole legal owner of Rose Cottage.  The prosecutor values Rose Cottage at £250,000.  There is an outstanding mortgage of £150,000.  The prosecutor therefore asserts that Charles has an available amount of £100,000.

Charles may challenge this on the basis that he is not the sole beneficial owner of Rose Cottage and that the current value of Rose Cottage is less than £250,000.  That challenge may have a bearing on whether the trigger condition is satisfied and on the value of Charles’ current available amount – with obvious implications for any amount which Charles may be ordered to pay now as a result of the s22 application.

A third area of challenge concerns what might loosely be described as ‘change of law’.  In 2005 Peter was convicted of mortgage fraud in that he had purchased a house with a mortgage of £100,000 which he had obtained by giving false information on his mortgage application.  Peter was subject to confiscation with a benefit of £100,000 (the amount of the mortgage advance) and an available amount of £20,000.  He was ordered to pay £20,000 which he has paid.  Peter now has £50,000 in a bank account in his sole name but no other assets (so his available amount is £50,000).  He is subject to a s22 application.

Peter may challenge the application on the basis that it would not be ‘just’ to order him to pay £50,000 under s22 as, on a proper and just interpretation of the legal position, he did not ‘obtain’ the mortgage advance and, in any event, the mortgage advance has since been fully repaid to the lender.

The court would then have to consider what further sum, if any, it would be ‘just’ to order Peter to pay under the confiscation order.  That may involve consideration of the price for which Peter ultimately sold the mortgaged property.

A fourth possible area of challenge concerns prosecution delay and Article 6(1) of the European Convention on Human Rights.  Consider the case of Derek who was subject to a confiscation order in 2006.  The court then found he had a benefit of £175,000 and an available amount of £25,000.  He was ordered to pay £25,000 which he has paid.  In 2011 the prosecution discovered that Derek was the sole owner of a property worth £200,000 which he had inherited from his father who died in 2009.  No action was taken by the prosecution at the time.  The file was reviewed in 2016 and an application was then made under s22.

Derek may challenge the application on the basis that it infringes his Article 6(1) rights in that the prosecutor has not brought the s22 application to court “within a reasonable time”.

Fifthly, a s22 application may be challenged on the basis that, taking everything into consideration, it would be simply unjust to order the defendant to make any further payment now – or that it would be unjust to require him to pay the full amount requested by the prosecution.  It might be argued, for example, that it would be just for the defendant to be ordered an amount based on his bank balance but not any part of the value of the equity in his home or the value of assets he uses in his legitimate business.  However such an argument would have to overcome the clear legislative policy in favour of maximising the recovery of the proceeds of crime, even from legitimately acquired assets.

There may be other bases on which a s22 application may be challenged.

 

Default sentence

The provisions of s22 permit the court to vary the amount to be paid under the confiscation order, but do not expressly authorise the court to vary the original default sentence (which will have been based on the original amount payable).

Section 35 authorises the court to set a default sentence when it “makes a confiscation order”, not when it varies one.  However s39 authorises the court to vary the default sentences in the circumstances detailed in that section.

One of the trigger conditions in s39 is that a confiscation order has been varied under s22 and the effect of the variation is to vary the maximum period of a default sentence applicable in relation to the order under s139(4) Powers of Criminal Courts (Sentencing) Act 2000.

Unfortunately when s35 was amended by s10 Serious Crime Act 2015 corresponding amendments to s39 were not made.  The effect appears to be that the court can vary the default term in accordance with the table of default terms in certain circumstances, but only in accordance with the default terms set out in s139(4) Powers of Criminal Courts (Sentencing) Act 2000.  These are the default terms which applied to confiscation orders made before 1 June 2015.

In other words, when considering a default term in the context of a s22 variation it is as if the changes to default sentences made by the Serious Crime Act 2015 had never happened.

 

Due date for payment & interest

Strictly speaking, s22 does not authorise the court to vary the due date for payment.  Under s11 this is closely tied to the date on which the confiscation order is “made” (not the date on which it is varied under s22).  Under s12 the defendant must pay interest on any amount which is not paid when it is required to be paid.

However it would appear to be a nonsense to charge interest, backdated to the date on which the confiscation order was originally made, on an additional amount.  Such an interest charge might be considered to infringe the defendant’s rights under Article 1 of the First Protocol of the European Convention on Human Rights.

 

Second revisit

After a confiscation order has been varied under s22 is it possible to revisit it again at a later date?  The short answer is ‘Yes’.

However on a subsequent revisit the ‘trigger’ condition will be interpreted as comparing the defendant’s current available amount with his available amount as determined on the most recent occasion on which an application was made under s22.

 

Appeals

It seems clear that a defendant can appeal against a s22 variation where he considers the variation to have been wrong in principle or manifestly excessive (see Padda referred to above).

On the other hand, it does not appear that a prosecutor is able to appeal against the amount by which the court decides to vary a confiscation order on a s22 application, or a decision not to make any variation – but he is able to make a fresh application under s22 at a later date.

 

Conclusion

There are a number of matters which will need to be carefully considered by prosecution and defence in connection with a prosecutor’s application under s22 for reconsideration of a defendant’s available amount.

 

Contacting us

Our contact details are here.

David

(Note: This article applies to confiscation proceedings under the provisions of Part 2 of the Proceeds of Crime Act 2002 in England and Wales.  Appropriate professional advice should be sought in each individual case.)

Piercing the corporate veil in confiscation

impostorPiercing the corporate veil in confiscation has a long history, but there is nothing expressly on the subject in Part 2 of the Proceeds of Crime Act 2002 (which deals with confiscation in England and Wales).  Instead the approach to piercing the corporate veil in confiscation is based on long established English legal principles and caselaw of more general application.

It is perhaps not unreasonable to suppose that if a criminal attempts to sidestep his responsibility for his criminal actions by interposing a company through which to commit his crimes then the courts should be able to ‘look through’ the company to the underlying reality of the situation.

On the other hand there is a long established legal principle that a company is a legal entity which is distinct from its directors and shareholders.

This article attempts to trace recent developments in piercing the corporate veil in caselaw in respect of confiscation and to suggest some practical implications of the present-day legal position in England and Wales.

WARNING – THIS IS A LENGTHY BLOG POST – IN EXCESS OF 6,000 WORDS

  1. Salomon v A Salomon and Co Ltd 1896
  2. Gilford Motor Co Ltd v Horne 1933
  3. Lazarus Estates Ltd v Beasley 1956
  4. HMRC v Hare 1996
  5. R v Dimsey and Allen 1999
  6. CPS v Jennings 2008
  7. R v Seager and Blatch 2009
  8. Prest v Petrodel Resources Ltd 2013
  9. R v Sale 2013
  10. McDowell and Singh v R 2015
  11. Boyle Transport (NI) Ltd v R 2016
  12. A clear and coherent picture?
  13. Practical implications

 

Salomon v A Salomon and Co Ltd 1896

Consideration of the corporate veil in the law of England and Wales has to start with the 1896 decision of the House of Lords (as the UK Supreme Court was known until relatively recently) in the case of Salomon v A Salomon and Co Ltd [1896] UKHL 1, [1897] AC 22.

This was not a criminal case, it was a case involving the insolvency of a limited company.  At that time company law (based on the Companies Act of 1862) required that a limited company must have at least seven shareholders in order to be legally constituted.  A Salomon and Co Ltd was duly incorporated with seven shareholders, one of whom was Mr Aron Salomon.  The remaining shareholders were Mr Salomon’s wife and five of his grown up children.

Mr Salomon had operated a successful sole trader business as leather merchant and boot and shoe manufacturer for many years.  He transferred this business to the newly formed company and in exchange received the vast majority of the shares in the company in part payment and obtained a debenture creating a charge over the assets of the company in respect of other monies due to him.

The result was that Mr Salomon become both the majority shareholder and a secured creditor of the company which carried on the business which he had formerly carried on in his own name.

Shortly after the business had been transferred to the company there appears to have been a downturn in the boot and shoe trade.  The company lost contracts and found itself with unsaleable stock.

When the business failed the company’s liquidator took legal action claiming that the arrangement had been, in general terms, a fraud designed to allow Mr Salomon to carry on his own business and reap the profits for himself but with protection from his creditors.  The liquidator claimed monies off Mr Salomon for the benefit of those creditors.  In court the business was described as a ‘one man’ company and it was suggested that the company was simply an agent of Mr Salomon, or alternatively that the relationship between Mr Salomon and the company was one of trustee and beneficiary.

The Court of Appeal considered that the objective of companies’ legislation was to facilitate the coming together of a group of people in business.  That was not what had happened here.  Indeed the Court of Appeal went as far as to say that “Mr Aron Salomon’s scheme is a device to defraud creditors”.

Whilst the Court of Appeal had found in favour of the liquidator the House of Lords reversed that decision, holding that A Salomon and Co Ltd was a properly constituted company and a distinct legal entity.  On the incorporation of the limited company proper procedures had been followed in accordance with the letter of the law.  There had been no fraud.

In consequence, the House of Lords held, Mr Salomon was entitled to the protection of limited liability and was not liable to meet the claims of the company’s creditors.

 

Gilford Motor Co Ltd v Horne 1933

Perhaps the first well known case in which the court pierced the corporate veil is Gilford Motor Co Ltd v Horne [1933] Ch 935.

Mr EB Horne had been the managing director of the Gilford Motor Co.  His contract of employment precluded him being engaged in any competing business in a specified geographical area for five years after the end of his employment “either solely or jointly with or as agent for any other person, firm or company”.

He left Gilford and carried on a competing business in the specified area, initially in his own name.  He then formed a company, JM Horne & Co Ltd, named after his wife, in which she and a business associate were shareholders.  The trial judge found that the company had been set up in this way to enable the business to be carried on under his own control but without incurring liability for breach of the covenant not to compete with his former employer.

However the reality, in the judge’s view, was that the company was being used as “the channel through which the defendant Mr Horne was carrying on his business.”

The company was restrained by the court in order to ensure that Mr Horne was deprived of the benefit which he might otherwise have derived from the separate legal personality of the company.

It does not follow that JM Horne & Co Ltd was to be identified with Mr Horne for any other purpose.  Mr Horne’s personal creditors would not, for example, have been entitled simply by virtue of the facts found by the court to enforce their claims against the assets of the company.

In short, Mr Horne was found to have created the company in order to evade his own pre-existing legal obligation not to compete with his former employer.  In those circumstances the court pierced the corporate veil to prevent Mr Horne from benefiting by abusing the separate legal personality of the new company.

 

Lazarus Estates Ltd v Beasley 1956

The case of Lazarus Estates Ltd v Beasley [1956] 1 QB 702 was not a case focussing on the corporate veil.

But it is an important and relevant case because of the famous dictum of Lord Denning in that case:-

“No court in this land will allow a person to keep an advantage which he has obtained by fraud.  No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud.  Fraud unravels everything.  The court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved, it vitiates judgments, contracts and all transactions whatsoever…”

This illustrates a broader principle governing cases in which the benefit of some apparently absolute legal principle has been obtained by dishonesty.  The authorities show that there are limited circumstances in which the law treats the use of a company as a means of evading the law as dishonest for this purpose.

 

HMRC v Hare 1996

The modern law of confiscation in England and Wales began with the Drug Trafficking Offences Act of 1986 and the Criminal Justice Act of 1988.

The case of HM Customs & Excise v Hare and Others [1996] EWCA Civ 1351 was concerned with a restraint order made under Criminal Justice Act 1988 powers against a number of individual defendants and certain companies under their control.

The basis of the application to the judge and the restraint order which he made was that the individual defendants, through the companies and otherwise, had carried out excise duty fraud in relation to alcoholic liquor in a sum then estimated as being in excess of £100m.  No charges had been brought against the companies themselves however.

It appears not to have been disputed that some of the companies’ trading had been legitimate although perhaps only a small part.  The accounting records of the companies were wholly inadequate.

The Court of Appeal held that the evidence provided a prima facie case that the defendants had control of the companies; that the companies had been used for fraud, in particular the evasion of excise duty on a large scale; that the defendants regarded the companies as carrying on a family business, and that company cash had benefitted the defendants in substantial amounts.

The Court of Appeal considered that Customs and Excise ought not to be criticised for not charging the companies.  The more complex commercial activities become, the more vital it is for prosecuting authorities to be selective in whom and what they charge, so that issues can be presented in as clear and short a form as possible.

It seemed to the Court of Appeal that no useful purpose would have been served by introducing into criminal proceedings the additional complexities as to the corporate mind and will, which charging the companies would have involved.  Conversely, there could have been justified criticism had the companies been charged merely as a device for obtaining orders under the Act in relation to their assets.

In all the circumstances, it was appropriate to lift the corporate veil in this case and to treat the stock in the companies’ warehouses and the motor vehicles as property held by the individual defendants.

 

R v Dimsey and Allen 1999

The case of R v Dimsey and Allen [1999] EWCA Crim 2261 was concerned with a confiscation order made under Criminal Justice Act 1988 powers against Mr Allen.

A large part of Mr Allen’s benefit for confiscation purposes was said to consist of the corporation tax liabilities of certain offshore companies, which had been evaded.  Mr Allen contended on appeal that these were not liabilities of his (they were liabilities of the companies concerned) and hence not benefit of his.

It was the prosecution case that his income and assets were held by offshore companies.  The properties in which he and his family lived were bought and sold in the name of offshore companies.  Offshore companies were used to pay for personal expenditure, including holidays, school fees and ordinary household expenses.  It was the prosecution case that Mr Allen himself managed and controlled the companies in the United Kingdom.  That aspect of the prosecution case was not challenged for the purposes of his appeal.

The Court of Appeal gave short shrift to the argument that the relevant benefit was not Mr Allen’s, holding that “it is plain from authorities cited by the Crown that the corporate veil may fall to be lifted where companies are used as a vehicle for fraud.  Here the companies in question were the appellant’s alter ego.  On this part of the case it seems to us that the Crown’s position is simply incontestable.  In those circumstances the appeal against the making of the confiscation order will be dismissed”.

 

CPS v Jennings 2008

On 14 May 2008 the House of Lords handed down important judgments in three confiscation cases, R v May [2008] UKHL 28, CPS v Jennings [2008] UKHL 29 and R v Green [2008] UKHL 30.

On the face of it Mr Jennings’ appeal concerned a restraint order made under Criminal Justice Act 1988 powers in relation to his assets, pending his trial on a charge of conspiracy to defraud.  But the issues raised in the appeal also concerned the amount of the benefit “obtained” by Mr Jennings from his offence.

The conspiracy was described by the prosecution as ‘an advance fee fraud’.  It was carried on through a company, UK Finance (Europe) Ltd, which had originally been in legitimate business selling second hand cars and arranging finance for the purchasers.  The company advertised itself as a lender, targeting people with poor credit ratings.  Applications for loans were made over the telephone.  An administration fee of £70 was required in return for arranging a loan.  But in fact the company had no money to lend, and no arrangements with any other source of finance to make loans, and no loans were ever made.

Mr Jennings was an employee of company.  He was neither a director nor a shareholder.

The prosecution alleged that each of the conspirators had benefited to the tune of the total amount of monies obtained from the fraud, calculated by the financial analyst employed by the police at £584,637.  This sum was made up of £460,809, which had gone through the company’s books, and £123,828, which was the value of postal orders cashed at a local post office.  Mr Jennings’ argument was that, over the period of the conspiracy, he and his wife could not have received more than, say, £50,000, made up of salary, a payment from the company’s loan account, and the postal orders which he had cashed “on several occasions” when the sole director, Mr Phillips, was away.

In relation to the amount of benefit Mr Jennings had “obtained” the judgment reached no conclusion, leaving that to be determined on the making of any confiscation order against him.  The court noted however that “obtained” must mean “obtained by him”.

In its judgment in the case of May the House of Lords said:-

“D ordinarily obtains property if in law he owns it, whether alone or jointly, which will ordinarily connote a power of disposition or control, as where a person directs a payment or conveyance of property to someone else. He ordinarily obtains a pecuniary advantage if (among other things) he evades a liability to which he is personally subject”.

Matters relating to Mr Jennings had moved on since the restraint order had been made in that, by the time of the House of Lords’ judgment, both Mr Phillips and Mr Jennings had been found guilty of the fraud.

In relation to piercing the corporate veil the House of Lords said, “In the ordinary way acts done in the name of and on behalf of a limited company are treated in law as the acts of the company, not of the individuals who do them.  That is the veil which incorporation confers.  But here the acts done by Mr Jennings and his associate Mr Phillips in the name of the company have led to the conviction of one and a plea of guilty by the other.  Thus the veil of incorporation has been not so much pierced as rudely torn away”.

That judgment might be regarded as the high water mark in piercing the corporate veil in confiscation proceedings.

 

R v Seager and Blatch 2009

The significance of the Court of Appeal decision in R v Seager and Blatch [2009] EWCA Crim 1303 is not the actual outcome for Mr Seager and Mr Blatch.  Each of them had been convicted of acting as a company director whilst disqualified from doing so.  The court held in each case that the corporate veil should not be pierced as the relevant company in each case was operating a legitimate business (albeit that the defendants should not have been acting as directors of those companies).

The significance of the judgment is in the summary of the law on the subject of piercing the corporate veil which is included in the judgment of the Court of Appeal, which held:-

“There was no major disagreement between counsel on the legal principles by reference to which a court is entitled to ‘pierce’ or ‘rend’ or ‘remove’ the ‘corporate veil’.  It is ‘hornbook’ law that a duly formed and registered company is a separate legal entity from those who are its shareholders and it has rights and liabilities that are separate from its shareholders.

A court can ‘pierce’ the carapace of the corporate entity and look at what lies behind it only in certain circumstances.  It cannot do so simply because it considers it might be just to do so.  Each of these circumstances involves impropriety and dishonesty.  The court will then be entitled to look for the legal substance, not the just the form.

In the context of criminal cases the courts have identified at least three situations when the corporate veil can be pierced.

  • First if an offender attempts to shelter behind a corporate façade, or veil to hide his crime and his benefits from it.
  • Secondly, where an offender does acts in the name of a company which (with the necessary mens rea) constitute a criminal offence which leads to the offender’s conviction.
  • Thirdly, where the transaction or business structures constitute a ‘device’, ‘cloak’ or ‘sham’, i.e. an attempt to disguise the true nature of the transaction or structure so as to deceive third parties or the courts.”

 

Prest v Petrodel Resources Ltd 2013

The judgment of the UK Supreme Court in the case of Prest v Petrodel Resources Ltd and Others [2013] UKSC 34 is undoubtedly significant in relation to the doctrine of piercing the corporate veil.  In view of all that had gone before it may also be regarded as surprising.

The case arose from the divorce of Michael and Yasmin Prest.  In essence Yasmin Prest made a claim, following her divorce from Michael Prest, on seven properties the legal ownership of which was held in the names of various companies.

One of the issues which arose, or appeared to arise, was whether the court was entitled to pierce the corporate veil to enable the court to ensure the satisfaction of a financial order made in the matrimonial court in favour of Yasmin Prest.

Ultimately the Supreme Court held that it was unnecessary to pierce the corporate veil as in reality the seven properties, though legally held in the names of the companies, were beneficially owned by Michael Prest.

However the Supreme Court considered in depth the doctrine of piercing the corporate veil and found little to commend the concept.  Lord Sumption said:-

“In my view, the principle that the court may be justified in piercing the corporate veil if a company’s separate legal personality is being abused for the purpose of some relevant wrongdoing is well established in the authorities.

It is true that most of the statements of principle in the authorities are obiter, because the corporate veil was not pierced.  It is also true that most cases in which the corporate veil was pierced could have been decided on other grounds.  But the consensus that there are circumstances in which the court may pierce the corporate veil is impressive.

I would not for my part be willing to explain that consensus out of existence.  This is because I think that the recognition of a limited power to pierce the corporate veil in carefully defined circumstances is necessary if the law is not to be disarmed in the face of abuse.

I also think that provided the limits are recognised and respected, it is consistent with the general approach of English law to the problems raised by the use of legal concepts to defeat mandatory rules of law.

The difficulty is to identify what is a relevant wrongdoing.  References to a ‘facade’ or ‘sham’ beg too many questions to provide a satisfactory answer.

It seems to me that two distinct principles lie behind these protean terms, and that much confusion has been caused by failing to distinguish between them.  They can conveniently be called the concealment principle and the evasion principle.

The concealment principle is legally banal and does not involve piercing the corporate veil at all.  It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant.  In these cases the court is not disregarding the ‘facade’, but only looking behind it to discover the facts which the corporate structure is concealing.

The evasion principle is different.  It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement”.

He went on:-
“I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.

The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality.  The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil.

I consider that if it is not necessary to pierce the corporate veil, it is not appropriate to do so, because on that footing there is no public policy imperative which justifies that course.

For all of these reasons, the principle has been recognised far more often than it has been applied.  But the recognition of a small residual category of cases where the abuse of the corporate veil to evade or frustrate the law can be addressed only by disregarding the legal personality of the company is, I believe, consistent with authority and with long-standing principles of legal policy”.

Lady Hale in a brief supporting judgment referred to “examples of the principle that the individuals who operate limited companies should not be allowed to take unconscionable advantage of the people with whom they do business”.

Lord Mance added:-
“It is however often dangerous to seek to foreclose all possible future situations which may arise and I would not wish to do so.  What can be said with confidence is that the strength of the principle in Salomon’s case and the number of other tools which the law has available mean that, if there are other situations in which piercing the veil may be relevant as a final fall-back, they are likely to be novel and very rare”.

In short the Supreme Court held that, in part because of other remedies available (which should then be used in preference), it will almost never be necessary to rely on the doctrine of piercing the corporate veil.

However it has to be said that the Supreme Court was not considering criminal misconduct and was not referred to cases such as Hare and Jennings.

It also should be remembered that the Supreme Court appears to have endorsed the dictum of Lord Denning in Lazarus Estates Ltd that “fraud unravels everything” (which applies not only to situations involving limited companies).

 

R v Sale 2013

The Court of Appeal decision in R v Sale [2013] EWCA Crim 1306 appears to be the first confiscation appeal after the Supreme Court decision in Prest in which issues of piercing the corporate veil were considered.

Mr Sale had been convicted of corruption and fraud by false representation in connection with gifts given to an employee of Network Rail.  Mr Sale was managing director of Sale Service and Maintenance Ltd which became a supplier to Network Rail.  The company obtained contracts for approximately £2m worth of work in consequence of the corruption.

In relation to the confiscation order Mr Sale argued that his benefit should be limited to the financial advantages he had himself received, rather than the sums received by the company under the contracts.

The Court of Appeal held that, following the Supreme Court decision in Prest, the earlier Court of Appeal decision in Seager and Blatch was still good law but was to be understood in the light of Prest.

In particular in relation to the three circumstances in which it had previously been said that “the corporate veil can be pierced” Seager and Blatch should now to be understood to mean instead that “a benefit obtained by a company is also treated in law by PoCA as a benefit obtained by the individual criminal”.

Mr Sale was the sole controller of the company and there was a very close inter-relationship between the corrupt actions of Mr Sale and steps taken by the company in advancing those corrupt acts and intentions, the reality was that the activities of both Mr Sale and the company were so interlinked as to be indivisible.  Insofar as the company was involved, what it did served to hide what Mr Sale was doing.

Accordingly in Mr Sale’s confiscation proceedings it was appropriate for the court to have regard to the transactions between Network Rail and the limited company and not to confine itself to the amounts which Mr Sale had personally received.

It may be noted that in Sale Mr Sale’s available amount was in excess of his benefit in any event and so was not a matter for consideration by the court.

 

McDowell and Singh v R 2015

In McDowell and Singh v R [2015] EWCA Crim 173 the Court of Appeal adopted the approach employed in Sale.

In particular it found that the defendant was the sole controller and beneficial owner of the company, which was his alter ego.  Accordingly the Crown Court was entitled to examine the receipts and profits of the company for the purpose of ascertaining the benefit obtained from the criminal conduct of the defendant personally.

 

Boyle Transport (NI) Ltd v R 2016

The case of Boyle Transport (Northern Ireland) Ltd v R [2016] EWCA Crim 19 was more factually complex.

Patrick Boyle and Mark Boyle had been at the relevant time the only directors of a haulage company, Boyle Transport Ltd, and had between them owned just over 50% of the shares in the company.  The remaining shares were held by other members of the Boyle family.

Patrick Boyle and Mark Boyle and a number of drivers employed by the company were convicted of conspiring to make false instruments in relation to tachograph records relating to the use of the company’s haulage vehicles.

Confiscation proceedings against Patrick Boyle and Mark Boyle followed.  In those confiscation proceedings the court held that each of the defendants had a criminal lifestyle and that in excess of 50% of the turnover of the company over a period of six years was to be regarded as benefit jointly obtained by them.  That resulted in a finding that each of Patrick Boyle and Mark Boyle had obtained a benefit of just over £10m.

The available amount of each defendant was significantly less than the benefit.  The court found the available amount of Patrick Boyle to be £1,097,622 and that of Mark Boyle to be £738,171.  In each case the available amount of the defendant included assets held by the company.

An added complication was that a new company, Boyle Transport (Northern Ireland) Ltd, had been incorporated and the entire fleet of vehicles and trailers of the old company and other assets were transferred to the new company of which Patrick Boyle and Mark Boyle were not directors.

The Crown Court found that the transfer of assets to the new company was not genuine but a mere device and made an order for the appointment of an enforcement receiver.  The new company appealed against that order.  At the same time Patrick Boyle and Mark Boyle appealed against the original confiscation orders.

On behalf of the new company it was contended that the old company was established as a legitimate company, carrying on a legitimate business: road haulage.  It had substantial assets and many employees, all deployed for that legitimate purpose.  True it was that business had been carried on, in a very significant way, in breach of the relevant regulations.  But that did not justify disregarding or piercing the corporate veil.  The old company was not an alter ego company on any view: it was not within the concealment principle.  Nor had the old company been established or operated in a way coming within the evasion principle.  In the circumstances of this case it was a negation of well settled company law principles, as confirmed in Prest, and indeed a negation of realities to equate the turnover obtained by the old company with benefit obtained by Patrick Boyle and Mark Boyle and to designate assets held by the old company as assets held by them.  That they were the ‘operating minds’ did not mean that they were the owners.  The judge had placed too much emphasis on the wrongdoing and not enough emphasis on the actual benefit they as individuals had obtained.

In essence the Court of Appeal agreed with these contentions and held that it would not be justified to treat the turnover of the old company, or the major part of it, as benefit obtained by Patrick Boyle and Mark Boyle individually; nor would it be justified to treat the assets of the old company (and hence of the new company) as realisable property of Patrick Boyle and Mark Boyle individually.

The Court of Appeal in its judgment in Boyle went on to comment upon earlier decisions in Hare, Prest, Sale and McDowell.  It considered that Sale and McDowell were decisions on their particular facts and implied that the caution expressed in the decision in Hare, many years ago, concerning the undesirability of charging the company itself with a criminal offence, may now be misplaced following the decision of the Supreme Court in Prest.

With regard to the decision in Jennings, the Court of Appeal noted that in that case the activities of the company were wholly fraudulent and it regarded Jennings as an example of the concealment principle identified in Prest.

The Court added:-

“The reality is that in the Crown Courts – as in many other courts – the phrase ‘piercing’ the corporate veil had been used broadly without focusing precisely on the two concepts of concealment and evasion as have now been identified by Lord Sumption in Prest.  One must not forget the obvious point that the context of confiscation proceedings under the 2002 Act is always criminal.  That, in factual terms, is a context very different from Salomon and is very different also from many of the reported decisions on lifting or piercing the corporate veil.

It is that criminal context which is capable of explaining why, in an appropriate case in confiscation proceedings, the involvement of a limited company quite frequently can, on the facts, be described as a mere facade or sham.   The companies in such cases are properly treated as alter egos, or agents, of their criminal controllers.

Many of the cases of this kind thus are clear examples of Lord Sumption’s concealment principle and do not involve, in the sense explained by Lord Sumption, ‘piercing’ the corporate veil at all: and it is that latter doctrine which is the one of “limited” and “rare” application”.

The Court however also cautioned against too great a readiness to reach a finding of alter ego in relation to any company, noting that “the fact that the incorporator is sole shareholder and director of a company does not mean that the company is thereby and for that reason alone to be treated as his alter ego”.

In relation to the much quoted passage from Seager and Blatch the Court suggested that the opening sentence be further modified to read, “In the context of criminal cases the courts have identified at least three situations when a benefit obtained by a company may, depending on the facts, also be treated in law by POCA as a benefit obtained by the individual criminal….”.

The Court of Appeal referred to six overlapping general propositions which Crown Courts may wish to take into account when considering piercing the corporate veil in confiscation proceedings:-

  1. The test is not simply a test of “justice”, which would be too vague and unprincipled.
  2. The Crown Court needs to assess the reality of the matter, but without departing from established principles relating to the separate legal status of a limited company.
  3. Confiscation is not aimed at punishment.
  4. The principles pertaining to piercing the corporate veil in confiscation are the same as those which apply in the civil courts.
  5. Regard should be had to the nature and extent of the criminality involved.
  6. Where a company is solely owned and controlled by a convicted defendant it will not necessarily follow that the company is his alter ego.

 

A clear and coherent picture?

So do we, as a result of all this caselaw, have a clear and coherent picture of when in confiscation proceedings it will be justified to treat the turnover of a limited company as benefit obtained by a defendant personally and when it will be justified to treat the assets of the company as realisable property of a defendant individually?

I suggest that we do not.

Following the decision of the Supreme Court in Prest the Court of Appeal could have abandoned the obiter dicta in Seager and Blatch and proposed an entirely new formulation in relation to piercing the veil of incorporation in confiscation proceedings.  It did not.

Or the Court of Appeal could have concluded that the dictum of Lord Denning that “fraud unravels everything” applies in confiscation proceedings and that the Supreme Court in Prest was not addressing such proceedings, which arise in a criminal context – reaffirming Seager and Blatch.  It did not.

Instead since Prest the Court of Appeal has progressively watered down Seager and Blatch and found itself facing different ways in Sale, McDowell and Boyle, whilst controverting Hare for good measure.

Prosecutors, lawyers and courts may well find themselves in many cases unclear as to the principles to be followed in quantifying a convicted defendant’s benefit and available amount for confiscation purposes where a limited company is involved.

 

Practical implications

In Boyle the Court of Appeal found that the convicted defendants were the only two directors of the company, that they between them owned more that 50% of the shares in the company and that more than 50% of the turnover of the company was derived from criminal conduct.  Yet they held that it would not be appropriate to ascribe to the convicted defendants for confiscation purposes any part of the turnover or assets of the company.

Defendants and their legal advisers will thereby be encouraged to contest in confiscation proceedings the piercing of the corporate veil in every case in which there is a sliver of legitimate trading in the operations of a company – and perhaps even in cases where there is not.

Prosecutors will be encouraged to charge not only company directors but also the companies themselves with criminal offences, with a view to avoiding in confiscation proceedings the difficulties which the Crown have encountered in Boyle.

As the outcome in Boyle demonstrates, individuals whose criminal conduct is undertaken through a limited company may fare very much better in confiscation than those whose criminality is undertaken individually or in an unincorporated partnership, unless the company itself is also charged, convicted and made subject to confiscation.  That may be particularly relevant in cases of money laundering, people or arms trafficking, bribery, intellectual property or modern slavery offences, and in relation to regulatory offences.

Even where an individual and a company are both subject to confiscation it is easy to imagine circumstances in which the bulk of the benefit would be regarded as obtained by the company (rather than the individual) with the result that the individual defendant would be less likely to be obliged to realise his legitimately acquired assets to satisfy a confiscation order.

I would suggest that in preparation for a confiscation hearing both prosecution and defence will now in many cases wish to prepare two computations of benefit and available amount based on the alternative outcomes that the court does, or does not, pierce the corporate veil.

Financial investigators preparing s16 statements for the prosecution will need to be alive to the possibility that assets apparently held by a company may be beneficially owned by an individual or vice versa, as will the lawyers and forensic accountants instructed by the defendants.

Where both the company and its directors are convicted of an offence and are subject to confiscation proceedings there will be an additional difficulty in valuing the director’s shares in the company for the purpose of determining his available amount, because the value of his shares may depend upon the outcome of the confiscation proceedings against the company.

All of these factors are likely to create extra work for prosecutors, lawyers, forensic accountants and the courts in years to come.

 

Contacting us

Our contact details are here.

David

(Note: This article applies to confiscation proceedings under the provisions of Part 2 of the Proceeds of Crime Act 2002 in England and Wales. Appropriate professional advice should be sought in each individual case.)

Balance of probabilities in confiscation

balance-scalesIn confiscation law ‘the balance of probabilities’ plays a key role.  Under s6(7) Proceeds of Crime Act 2002 the court must decide any question relevant to the determination of the amount which the defendant is to be ordered to pay on the balance of probabilities.

But what does that mean?

 

The balance of probabilities

Some years ago the House of Lords (as the UK Supreme Court was known at the time) considered the meaning of the phrase ‘the balance of probabilities’ in the case of Re H & Others (minors) [1995] UKHL 16.  The case actually concerned an application by a local authority for a care order under the Children Act 1989 in respect of certain children who may or may not have become subject to significant harm if they remained in the care of their mother and step-father.

Nevertheless I suggest that the House of Lords’ comments in that case on the meaning of the expression ‘the balance of probabilities’ are of wider application.  Indeed when s6(7) of the then Proceeds of Crime Bill was being considered by a committee of MPs they were referred by the government minister to this judgment.

The House of Lords’ judgment includes the following:-

“The balance of probability standard means that a court is satisfied an event occurred if the court considers that, on the evidence, the occurrence of the event was more likely than not. When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence. Deliberate physical injury is usually less likely than accidental physical injury.  . . .  Built into the preponderance of probability standard is a generous degree of flexibility in respect of the seriousness of the allegation.”

“Although the result is much the same, this does not mean that where a serious allegation is in issue the standard of proof required is higher. It means only that the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred. The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established.”

In the later case of Re B (Children) [2008] UKHL 35, the House of Lords commented on this passage, stressing the importance of the words “to whatever extent is appropriate in the particular case“.  The judgment went on:-

“There is only one rule of law, namely that the occurrence of the fact in issue must be proved to have been more probable than not. Common sense, not law, requires that in deciding this question, regard should be had, to whatever extent appropriate, to inherent probabilities.”

In another House of Lords case in 2008, Re CD (Northern Ireland) [2008] UKHL 33 Lord Carswell said, at para [28]:-

“A possible source of confusion is the failure to bear in mind with sufficient clarity the fact that in some contexts a court or tribunal has to look at the facts more critically or more anxiously than in others before it can be satisfied to the requisite standard.  The standard itself is, however, finite and unvarying.  Situations which make such heightened examination necessary may be the inherent unlikelihood of the occurrence taking place (Lord Hoffmann’s example of the animal seen in Regent’s Park [which may have been a lioness or an Alsatian]), the seriousness of the allegation to be proved or, in some cases, the consequences which could follow from acceptance of proof of the relevant fact.  The seriousness of the allegation requires no elaboration: a tribunal of fact will look closely into the facts grounding an allegation of fraud before accepting that it has been established.  The seriousness of consequences is another facet of the same proposition: if it is alleged that a bank manager has committed a minor peculation, that could entail very serious consequences for his career, so making it the less likely that he would risk doing such a thing.  These are all matters of ordinary experience, requiring the application of good sense on the part of those who have to decide such issues.  They do not require a different standard of proof or a specially cogent standard of evidence, merely appropriately careful consideration by the tribunal before it is satisfied of the matter which has to be established.”

In a further case, Re S-B Children [2009] UKSC 17, Lady Hale in the Supreme Court said:-

“There is no necessary connection between the seriousness of an allegation and the improbability that it has taken place. The test is the balance of probabilities, nothing more and nothing less.”

So it is the inherent improbability of an event, not its seriousness, which as a matter of common sense will be in the mind of the court when deciding an issue on the balance of probabilities.

 

Confiscation proceedings

In confiscation proceedings the court will be dealing with a defendant who has been convicted of an offence.  The existence of that conviction, and the evidence already accepted by the court in relation to it, cannot be ignored by the court when drawing conclusions relevant to the confiscation order.

However I suggest the court should not lose sight of the significance of ‘the balance of probabilities’ when determining matters which are in dispute in the consequent confiscation proceedings.

 

Contacting us

Our contact details are here.

David

(Note: This article applies to confiscation proceedings under the provisions of Part 2 of the Proceeds of Crime Act 2002 in England and Wales.  There are a number of additional issues which could be relevant to a defendant’s confiscation proceedings in particular cases which it is not possible to deal with in a relatively short article such as this.  Appropriate professional advice should be sought in each individual case.)

Confiscation & proportionality

Scales of justiceSince the UK Supreme Court decision in R v Waya [2012] UKSC 51 the issue of proportionality in confiscation has been exercising legal minds in England & Wales.

As a direct consequence of that judgment, in 2015 the UK Parliament amended s6(5) Proceeds of Crime Act 2002 by adding at the end of the subsection the words, “Paragraph (b) applies only if, or to the extent that, it would not be disproportionate to require the defendant to pay the recoverable amount”.

But what does this mean in practice?

 

The 5 steps to making a confiscation order

One can now view the Crown Court process at a confiscation hearing (in a simplified way) as involving a 5 step process resulting in the confiscation order.

  1. Identify and evaluate the defendant’s ‘benefit’ in accordance with s76 (taking into consideration as appropriate the valuation provisions of sections 79 & 80 and making where applicable the assumptions in s10),
  2. Evaluate, if possible, the defendant’s ‘available amount’ in accordance with s9 (taking into account the provisions of sections 77 to 81),
  3. Determine which of (1) and (2) is the lower sum, this sum is called the ‘recoverable amount’, s7,
  4. Consider whether a confiscation order requiring the convicted defendant to pay the ‘recoverable amount’ would be disproportionate, s6(5),
  5. If a confiscation order requiring payment of the ‘recoverable amount’ would not be disproportionate make a confiscation order in the ‘recoverable amount’; but if such an order would be disproportionate then make a confiscation order requiring payment of the highest amount which would not be disproportionate.

 

What is meant by ‘disproportionate’?

The need to avoid a disproportionate confiscation order springs from Article 1 of the First Protocol to the European Convention on Human Rights, often referred to as ‘A1P1’.  This in effect requires that there must be a reasonable relationship of proportionality between the means employed by the State in the deprivation of property as a form of penalty and the legitimate aim which is sought to be realised by the deprivation.

To put this another way, legislation should not operate more harshly in removing assets from the convicted defendant than is required by the legitimate aims of that legislation.  The legislation must strike a fair balance between the demands of the general interest of the community and the requirements of the protection of the individual defendant’s fundamental rights.

A confiscation order which is so harsh as to fail to maintain a fair balance between these competing demands and requirements will be disproportionate.

 

What is proportionate?

The UK Supreme Court in Waya gave examples of what it would regard as proportionate in the context of confiscation.

They said that a legitimate, and proportionate, confiscation order may have one or more of three effects:

      (a) it may require the defendant to pay the whole of a sum which he has obtained jointly with others;
      (b) it may require several defendants each to pay a sum which has been obtained, successively, by each of them, as where one defendant pays another for criminal property;
      (c) it may require a defendant to pay the whole of a sum which he has obtained by crime without enabling him to set off expenses of the crime.

It follows from this that a confiscation order will not be regarded by the courts as disproportionate simply because it requires a convicted defendant to pay more than the sum which he would have been required to pay to put him back in the financial position he would now be in if he had not committed his crime.

Although the expression ‘pay back’ is sometimes used in connection with confiscation, a confiscation order can require much more than that.

 

Examples of ‘disproportionate’ orders

The UK Supreme Court however did indicate that where the benefit obtained by the defendant has been wholly restored to the loser a confiscation order which required him to pay the same sum again does not achieve the object of the legislation and so would be disproportionate.

Subsequent decisions of the Supreme Court and the Court of Appeal have extended that to other situations which the courts have considered to be analogous to restoration of property to the loser.

 

Loose ends

The ramifications of the Supreme Court judgment in the Waya case in situations considered to be analogous to restoration of property to the loser are still being worked through in courts up and down England & Wales.  I expect to return to this subject in a future blog article.  I have already written about the parallel issue of the making of both confiscation and compensation orders in respect of the same benefit (‘Confiscation and compensation – double trouble?‘).

But there is another issue arising which as yet has not been addressed, as far as I am aware, either by the courts or by Parliament.

Where a confiscation order is limited by the defendant’s ‘available amount’ it is an order in that amount which the court has to consider proportionate or disproportionate.  If an order in the sum of the ‘available amount’ is proportionate it may still be the case that an order based on the amount of the defendant’s ‘benefit’ would have been disproportionate.

If and when the prosecution seeks a variation of the original confiscation order under s22, perhaps because the defendant has acquired further assets since the date of the original order, the Crown Court will again be obliged not to infringe A1P1.  In consequence the Crown Court on hearing an application under s22 will be required to consider whether the variation it plans to make to the original confiscation order would make the revised order disproportionate.  That will involve careful consideration of the original benefit and any restoration of that benefit to the loser, as well as consideration afresh of the defendant’s current ‘available amount’.  Ultimately under s22(4)(a) the court is obliged to amend the amount required to be paid to such amount as “it believes is just”.  I have written previously on the subject of s22 (‘PoCA section 22 – unfit for purpose?‘).

 

Contacting us

Our contact details are here.

David

(Note: This article applies to confiscation proceedings under the provisions of Part 2 of the Proceeds of Crime Act 2002 in England and Wales.  There are a number of additional issues which could be relevant to a defendant’s confiscation proceedings in particular cases which it is not possible to deal with in a relatively short article such as this.  Appropriate professional advice should be sought in each individual case.)

Confiscation & compensation – double trouble?

doppelgangerFor some years courts have wrestled with the issue of compensation & confiscation.  Should the Crown Court make both a compensation order (in favour of the victim of the crime) & a confiscation order (effectively in favour of the Crown) in respect of the same benefit obtained by a convicted defendant?

The Court of Appeal recently considered the issue again in the case of Davenport v R [2015] EWCA Crim 1731.

 

Statute law

The power to make a compensation order in the Crown Court derives from s130 Powers of Criminal Courts (Sentencing) Act 2000.  The power to make a confiscation order in the Crown Court derives from s6 Proceeds of Crime Act 2002.  The legislation clearly envisages that the Crown Court may make both a compensation order and a confiscation order when dealing with an offence.

In particular s13 PoCA 2002 (as amended by s6 Serious Crime Act 2015 with effect from 1 June 2015) defines a “priority order” in subsection (3A) to include a compensation order and sets out what the court is to do where a court is making both a confiscation order and one or more priority orders against the same person in the same proceedings and the court believes the person will not have sufficient means to satisfy all of those orders in full.

In these circumstances the court must direct that so much of the amount payable under the priority order(s) as it specifies is to be paid out of any sums recovered under the confiscation order; and the amount it specifies must be the amount it believes will not be recoverable because of the insufficiency of the person’s means, subsection (6).

The other types of priority order now identified in subsection (3A) include a surcharge order under s161A Criminal Justice Act 2003, an unlawful profit order under s4 Prevention of Social Housing Fraud Act 2013 and a forfeiture order under s23 or s23A Terrorism Act 2000.  It is anticipated that a slavery and trafficking reparation order under s8 Modern Slavery Act 2015 will be added to the list of priority orders in due course.

 

Case Law

The Court of Appeal have considered the making of both compensation orders and confiscation orders against the same person in the same proceedings in the cases of Jawad v R [2013] EWCA Crim 644 and of Davenport v R [2015] EWCA Crim 1731.  Both of these judgments post-date the UK Supreme Court decision in the case of R v Waya [2012] UKSC 51 which highlighted the importance of proportionality in the making of confiscation orders and resulted in the amendment to s6(5)(b) PoCA 2002.

 

The issue

The problem is that whilst the statute law makes clear that it is possible for the court to make a compensation order and a confiscation order against the same person in the same proceedings – and sets out what the court should do if the offender cannot pay both orders in full, the statute gives no guidance as to what the court should do if the offender can pay both.

Since the decision in Waya and the amendment to s6(5)(b) would it now be disproportionate, and therefore wrong, for the court to make a compensation order and a confiscation order in respect of the same benefit obtained from the same offence against an offender who appears to be in a position in which he can pay both?

This was the question addressed in Jawad and in Davenport.

The Court of Appeal considered in Jawad that it generally will be disproportionate to require the defendant to pay for a second time money which he has fully restored to the loser – and an order for a lesser sum which excludes the double counting ought generally to be the right order.  What will bring disproportion, said the Court, is the certainty of double payment.  If it remains uncertain whether the loser will be repaid, a POCA confiscation order which includes the sum in question (and therefore requires the same benefit to be recovered twice – by compensation & confiscation orders) will not ordinarily be disproportionate, concluded the Court of Appeal.

In Davenport the Court of Appeal appears to have taken a slightly more relaxed approach.  It held that mathematical certainty of restitution is not required.  The court should approach matters in a practical and realistic way in deciding whether restitution is assured.  Restitution to the victims in the future is capable of being properly assessed as assured, depending on the particular circumstances, notwithstanding that such restitution will not be immediate, or almost immediate, at the time of the confiscation hearing.  Obviously the longer the time frame the greater force there will be to an argument that restitution is not assured: but a prospective period of delay in realisation is not of itself necessarily a conclusive reason for proceeding to make a combination of such orders without adjusting the amount of the confiscation order.

Whilst a defendant who is truly intent on making restitution in full to his victims ordinarily should be expected to have arranged such restitution prior to the date of the confiscation hearing there may sometimes be cases where that is not possible.  If, in such a case, the court has firm and evidence-based grounds for believing that restitution may nevertheless be forthcoming, albeit that cannot be taken as “assured” at the time of the hearing, the court has power in its discretion to order an adjournment to enable matters to be ascertained.

But, said the Court of Appeal, each case must be decided on its own facts and circumstances.

 

Contacting us

Our contact details are here.

David

(Note: This article applies to confiscation proceedings under the provisions of Part 2 of the Proceeds of Crime Act 2002 in England and Wales.  There are a number of additional issues which could be relevant to a defendant’s confiscation proceedings in particular cases which it is not possible to deal with in a relatively short article such as this.  Appropriate professional advice should be sought in each individual case.)

S10A PoCA 2002 determinations – appeals & reconsideration

Scales of justiceOnce the Crown Court has made a ‘determination’ for the purposes of confiscation of the extent of a convicted defendant’s interest in an asset can that ‘determination’ be altered on an appeal or reconsideration?

The short answer is ‘Yes’.  A previous article ‘Crown Court section 10A determinations in confiscation‘ considered the new power to make a ‘determination’ introduced by s1 Serious Crime Act 2015 which inserted new s10A into the Proceeds of Crime Act 2002.

This article goes on to consider appeal & reconsideration of s10A determinations.

 

Appeal

A s10A determination may be appealed either by the prosecutor or by a person whom the Court of Appeal thinks is or may be a person holding an interest in the asset in question, but different eligibility rules apply, see s3 SCA 2015.

Whoever wishes to appeal to the Court of Appeal will not be permitted to do so where a receiver has already been appointed under s50 PoCA 2002, or where the Court of Appeal believes that an application is to be made by the prosecutor for the appointment of a receiver, or where such an application has been made but has not yet been determined.

In addition where the intended appeal is to be made by a person who claims to hold an interest in the asset the appeal must be on the basis that either the person was not given a reasonable opportunity to make representations when the determination was made, or that giving effect to the determination would result in a serious risk of injustice to that person, or both.

But what is meant by “a serious risk of injustice”?  I would suggest that this is not restricted to a risk of serious injustice – what is serious is the risk, not the injustice.  When considering the meaning of the same phrase in earlier confiscation legislation the Court of Appeal in the case of R v Benjafield [2000] EWCA Crim 86 held, at paragraph [41.4]: “any real as opposed to a fanciful risk of injustice can be appropriately described as serious”.

It is doubtful whether an error which had an insignificant impact on the outcome would be regarded as creating an “injustice”.  However it may prove to be the case that the need to show “a serious risk of injustice” will not be an especially difficult hurdle for a potential appellant.

On hearing an appeal against a determination the Court of Appeal may confirm the determination, or make such order as it believes is appropriate.  The decision of the Court of Appeal may be further appealed to the Supreme Court.

 

Reconsideration in the Crown Court

When the Crown Court is appointing a receiver under s50 it may confer various powers upon the receiver including (but not limited to) power to manage or realise any realisable assets, and the court may may order a person holding an interest in a realisable asset to make payment to the receiver in respect of a beneficial interest in that asset held by the convicted defendant or the recipient of a tainted gift, see s51(2) & (6).

Where a s10A determination in respect of an asset has not previously been made the Crown Court must not exercise those powers without giving any person holding an interest in the asset a reasonable opportunity to make representations to it, s51(8).

Where a s10A determination in respect of an asset has previously been made that will bind the Crown Court when appointing the receiver, unless the Crown Court finds on an application by a person holding an interest in the asset that either the person was not given a reasonable opportunity to make representations when the determination was made and has not appealed against the determination, or that giving effect to the determination would result in a serious risk of injustice to that person, or both – see s51(8B) inserted by s4 SCA 2015.

The effect therefore is that the s10A determination can be undone by the Crown Court when it is appointing a receiver (unless that determination has already been subject to an appeal to the Court of Appeal).

 

The combined effect

The combined effect of these provisions is that a person with an interest in the asset will have an opportunity either to appeal to the Court of Appeal against the determination or an opportunity to ask the Crown Court to reconsider the determination (but cannot do both).

In either case the person with the interest will have to satisfy the court that either he was not given a reasonable opportunity to make representations when the determination was made, or that giving effect to the determination would result in a serious risk of injustice to him, or both.

He will need to do that on or before the appointment of a receiver under s50.

It remains the case that the powers of the receiver must be exercised with a view to allowing a person other than the defendant or a recipient of a tainted gift to retain or recover the value of any interest held by him, see s69(3)(a).

A s10A determination is a determination of the defendant’s interest in the asset rather than a determination of the interests of others but clearly has a relevance to issues arising under s69(3)(a).

 

Conclusion

The existence of these opportunities to challenge the previous ‘conclusive’ s10A determination may be thought to go a long way to nullify the perceived attractions of inviting the Crown Court to make a s10A PoCA 2002 determination when making a confiscation order.

 

Contacting us

Our contact details are here.

David

(Note: This article applies to confiscation proceedings under the provisions of Part 2 of the Proceeds of Crime Act 2002 in England and Wales. There are a number of additional issues which could be relevant to a defendant’s confiscation proceedings in particular cases which it is not possible to deal with in a relatively short article such as this. Appropriate professional advice should be sought in each individual case.)

UK Supreme Court rules on money laundering arrangements

Supreme Court logoThe UK Supreme Court recently ruled on the law relating to prosecutions for entering into, or becoming concerned in, an arrangement which facilitates the acquisition, retention, use or control of criminal property for, or on behalf of, another person – contrary to s328 Proceeds of Crime Act 2002.

The case arose as a result of the actions of a fraudster, referred to as ‘B’.

Shortly before commencing his fraud the defendant, referred to as ‘H’, opened two bank accounts and handed control of them to ‘B’ who then used them in connection with his frauds.  ‘B’ conned unsuspecting members of the public into making payments into these bank accounts (for services which in truth were non-existent).

The prosecution case was that ‘H’ must have known or at least suspected that ‘B’ had some criminal purpose even if he was not aware of the details of the con.  ‘B’ was convicted of fraud.  ‘H’ was charged with becoming concerned in an arrangement contrary to s328 PoCA 2002.

The Supreme Court was required to consider whether, in the circumstances alleged, ‘H’ could be guilty of a s328 offence – R v GH [2015] UKSC 24 (22 April 2015).

The Supreme Court broke the issue down into four key questions.  In addressing those questions it overturned some decisions of the courts below.

 

1  Must the property be ‘criminal property’ before the arrangement operates on it?

Counsel for the prosecution submitted to the Supreme Court that the same conduct could both cause property to become criminal and simultaneously constitute the offence charged under s328.  He made the same submission in relation to sections 327 and 329, correctly recognising that the three sections have to be construed coherently.

So, he submitted, a thief who steals “legitimate” property is necessarily at the same time guilty of “acquiring criminal property” contrary to s329.

The Supreme Court rejected that view, holding that it failed to recognise the necessary distinction between a person who acquires criminal property and one who acquires legitimate property by a criminal act or for a criminal purpose.

Sections 327, 328 and 329 are aptly described as “parasitic” offences because they are predicated on the commission of another offence which has yielded proceeds which then become the subject of a money laundering offence.

The Supreme Court therefore approved the decision of the Court of Appeal in an earlier case R v Geary [2010] EWCA Crim 1925 that to say that s328 extends to property which was originally legitimate but became criminal only as a result of carrying out the arrangement is to stretch the language of the section beyond its proper limits.  I have discussed the Geary case more fully in an earlier article on this blog.

However, for example, a thief who steals legitimate property might then commit a s329 money laundering offence by his possession or use of that property after his acquisition of it.

In practice such a thief should normally face a charge of theft rather than one of money laundering.  But the legal point that he may also be guilty of a money laundering offence is an important one because of the obligation on banks & others in the ‘regulated sector’ to report suspicions of money laundering under s330.

 

2  Must the ‘criminal property’ exist before the defendant joins the arrangement?

The Supreme Court agreed with the decision of the Court of Appeal in holding that it does not matter whether criminal property existed when the arrangement was first hatched.  What matters is that the property should be criminal property at a time when the arrangement operates on it.

It should be noted that the Supreme Court did not hold it to be necessary that the property should be criminal property at the time when the arrangement commences to operate on it.

The offence is complete when the arrangement becomes one which facilitates the acquisition, retention, use or control of criminal property for, or on behalf of, another person and the defendant knows or suspects this to be the case.

 

3  Were the monies ‘criminal property’ before being paid into the defendant’s bank account?

Counsel for the prosecution made a somewhat technical submission to the Supreme Court that the monies banked were criminal property at the time of payment because they represented a chose in action, namely the obligation of the purchasers of the supposed services to pay for them.

The Supreme Court were unimpressed by this submission, holding that there was a stark absence of material before the court to substantiate a case of this nature.

However the court did not close the door on such an argument being successfully presented in a future case.

 

4  Was the actus reus of the offence committed on the facts of the case?

Looking at the substance of the matter, the money paid by the victims into the accounts was lawful money at the moment at which it was paid into those accounts.  It was therefore not a case of the account holder acquiring criminal property from the victims.

But by the arrangement the respondent also facilitated the retention, use and control of the money by or on behalf of ‘B’.  Did the arrangement regarding the facilitation of the retention, use and control of the money fall foul of s328 on the basis that it was criminal property at that stage, since it was the proceeds of a fraud perpetrated on the victims?

In this case the character of the money did change on being paid into the defendant’s accounts.  It was lawful property in the hands of the victims at the moment when they paid it into the defendant’s accounts.  But it then became criminal property in the hands of ‘B’, not by reason of the arrangement made between ‘B’ and the defendant, but by reason of the fact that it was obtained through fraud perpetrated by ‘B’ on the victims.

There was a crucial difference therefore between this case and the situation in Geary (in which the arrangement itself had been the reason that the property in question became criminal property).

The Supreme Court (overturning the decision of the Court of Appeal) held that there was no artificiality in recognising that change in character of the money, and that it would be appropriate to regard the defendant as entering into or becoming concerned in an arrangement to retain criminal property for the benefit of another.

It was the retention, use & control of the monies after they had been paid into the bank accounts as the result of a fraud, under the bank account arrangement made earlier between ‘B’ & ‘H’, which could properly form the basis of a conviction of ‘H’ under s328.

 

Contacting us

Our contact details are here.

David

(Note: This article applies to prosecutions under the provisions of Part 7 of the Proceeds of Crime Act 2002 in England and Wales.  There are a number of additional issues which could be relevant to a defendant’s trial in particular cases which it is not possible to deal with in a relatively short article such as this.  Appropriate professional advice should be sought in each individual case.)

Confiscation & legitimate businesses

Business officeDo recent English Court of Appeal decisions map out a new approach to confiscation when applied to legitimate businesses which have become tainted with criminality?

Has there been an evolution in the assessment of ‘benefit’ following the Supreme Court judgment in Waya?

Are the courts in certain circumstances now looking to confiscate only the profit from trading?

 

Payments received

Whilst one could describe drug trafficking as a ‘business’ as it involves trading in goods, it has long been the case – since the Drug Trafficking Offences Act 1986 in fact – that the gross receipts of such a ‘business’ are treated as ‘benefit’ for confiscation purposes.

Drug trafficking is of course a wholly criminal enterprise.  Prior to the Proceeds of Crime Act 2002 confiscation in respect of drug trafficking was dealt with under a separate legislative regime which specified that the offender’s benefit was “any payments or other rewards received”.  That can only mean the gross receipts.

 

Property obtained

But the wording of the confiscation provisions in s71 Criminal Justice Act 1988, relating to non-drug crime, referred to property “obtained” as a result of or in connection with the offence.  Similar wording was adopted when the two different legislative regimes for confiscation were merged in PoCA 2002.  Is the notion of what an offender has “obtained” a more flexible one than what he has “received”?

Initially the PoCA 2002 formulation was considered, identically to the old drug crime wording, to refer to gross receipts.  For example the Court of Appeal in CPS Nottinghamshire v Rose [2008] EWCA Crim 239 at paragraph [67] said “it can safely be assumed that Parliament, in enacting the legislation, did not intend to weaken the application of the existing confiscation regime”.

The House of Lords in the case of CPS v Jennings [2008] UKHL 29 confirmed that “obtained” meant obtained, solely or jointly, by the offender himself & that a person may “obtain” property without it actually passing through his hands.  In R v May [2008] UKHL 28 it was said that a defendant “ordinarily obtains property if in law he owns it”.  In that sense the notion of what has been “obtained” may be wider than that which has been “received”.

But the House of Lords also recognised that a person may “receive” property without “obtaining” it – as in the case of a courier.

 

High water mark

Perhaps the case of Del Basso & Goodwin v R [2010] EWCA Crim 1119 might be regarded as a high water mark in the application of confiscation to legitimate business.  In that case the offenders operated a ‘park & ride’ business in contravention of an enforcement order.  There was no local authority planning permission allowing the use of the land in question for that purpose.  A confiscation order based on the gross receipts of the business was upheld by the Court of Appeal notwithstanding the acknowledged fact that in other respects the business was operated in a proper & lawful manner.

 

Scottish High Court case

But in a case involving the Weir Group PLC, a quoted company, the Scottish High Court took a very different line.  The Weir Group PLC paid an agreed figure of £13,945,962 in confiscation and a fine of £3m after pleading guilty to two charges of breaching UN sanctions in connection with a number of ‘Oil for Food’ programme contracts awarded between 2000 and 2002.  The company admitted breaching UN sanctions applicable at the time on doing business with Iraq which was then ruled by Saddam Hussein’s regime.

Under the relevant statute, s1(1) Proceeds of Crime Scotland Act 1995, the Scottish Court had discretion to make a confiscation order in “such sum as the court thinks fit”.  The Weir Group companies had secured 16 contracts, for which they were paid £34,340,204, by paying ‘kickbacks’ of £3,104,527. The confiscation order was for only £13,945,962. This included Weir’s gross profit of £9,414,283 from the contracts – plus the kickbacks of £3,104,527 and the fee of £1,427,152 paid to Weir’s agent in Iraq.

The confiscation order could have been for £20m more had the Scottish Court settled on the gross receipts as the appropriate figure for confiscation.

 

Three contrasting situations

Recent Court of Appeal decisions in England & Wales appear to differentiate between three contrasting situations.

The first is where a licence or other form of authorisation is mandatory when carrying on a particular trade or business activity but the absence of that licence does not render the trading itself illegal.  So, for example, in Sumal & Sons (Properties) Ltd v London Borough of Newham [2012] EWCA Crim 1840 the company was convicted of being the owner of a rented property without a licence contrary to s95(1) Housing Act 2004.

However the Court of Appeal found that the Housing Act did not prohibit the renting out of an unlicensed property & that the rent was legally recoverable from tenants even where the required licence had not been obtained.

That being the case, the rent was not received or obtained as a result of or in connection with the offence & so was not ‘benefit’ for confiscation purposes.

A similar result occurred in the case of Mr Singh who failed to obtain a licence under s1(1) Scrap Metal Dealer’s Act 1964, before he carried on business as a scrap metal dealer – see McDowell & Singh v The Queen [2015] EWCA Crim 173.  Again his trading activity was not itself prohibited due to the absence of a licence & therefore no ‘benefit’ for confiscation purposes arose from it.

The underlying trading was not itself an illegal activity, nor could it be said to have resulted from the criminal conduct.

Confiscation orders which had been made in these cases were quashed on appeal.

 

Illegitimate trading

At the other end of the scale we have trading activity which is itself illegal, being prohibited by law.  Obviously drug trafficking falls into this category but so too was the trading of a company controlled by Mr McDowell who was convicted of being knowingly concerned in the supply, delivery, transfer, acquisition or disposal of controlled goods with intent to evade the prohibition thereon, contrary to Article 9(2) Trade in Goods (Control) Order 2003.

The trading in question involved the delivery of aircraft and other military equipment from China to Ghana.  The Court of Appeal found the underlying transactions to be prohibited and unlawful.  Mr McDowell’s criminal offence was being concerned in the trading activity.  His ‘benefit’ for confiscation purposes was the gross amount received from that trading.

Intriguingly however the Court of Appeal added, “We were informed only that the company’s accounts revealed the gross profit made by the company in consequence of all its trading. In these circumstances, even if, in principle, the court had been prepared to entertain a submission that the appellant’s benefit was for a lesser sum than his receipts, he had manifestly failed to discharge the burden of proof.”

 

Legitimate trading resulting from criminality

But the Court of Appeal in McDowell suggests at paragraph [51] there is a middle ground – “In a case in which the underlying transactions producing the appellant’s receipts are lawful and not criminal, the cost of those transactions to the defendant may, on the grounds of proportionality, properly be treated as consideration given by the appellant for the benefit ‘obtained’. There may be no “loser” as contemplated by the Supreme Court in Waya and by the Vice President in Jawad, but the underlying principle is the same – the defendant has not gained by his conduct to the extent that he has given value for his receipts. Each case must be decided according to its particular facts.”

We are dealing here with the situation in which the defendant has committed an offence and that offence has resulted in trading activity which would not otherwise have occurred – but the underlying trading activity is not itself criminal conduct.

An earlier decision of the Court of Appeal had concerned a Mr Sale who had obtained contracts for his engineering company from Network Rail by bribing one of their employees, R v Sale [2013] EWCA Crim 1306.  The engineering work was properly performed and was, of itself, an entirely legal trading activity.

The Court of Appeal concluded that the amount to be confiscated was not the gross receipts of the company under the contracts but was the company profit plus the the pecuniary advantage gained by obtaining market share, excluding competitors, and saving on the costs of preparing proper tenders for the work.  The Court of Appeal held that, on grounds of proportionality & in the light of the Supreme Court decision in Waya, the amount ordered to be paid under the confiscation order ought to have been calculated on that basis.

In another case, R v Boughton Fox [2014] EWCA Crim 2940, the court had found that customers had been induced by dishonest misrepresentations to enter into legitimate leasing agreements upon terms which were, in the event, more onerous than had been represented to them.  The defendant’s company had received commission from the lessors on the signing of the lease agreements.  The defendant was convicted of conspiracy to defraud and was subject to a confiscation order.

The Court of Appeal, following Sale, concluded “that the benefit to the appellant might arguably be reflected as (1) the gross profit from the dishonest trading activity, (2) the increase in market value of the company, if any, represented by the dishonest trading activity with (3) an adjustment to represent the appellant’s 50% interest in the company”.

In the event however there was no information before the Court enabling it to assess the benefit in that way & it instead took Mr Boughton Fox’s benefit to be a proportion of the salary & dividends received by him over the period of the offending.

 

Conclusion

It appears that in the three contrasting situations the amount to be paid under a confiscation order may be based on (a) no benefit, (b) benefit equal to gross receipts, or (c) a figure based, on grounds of proportionality, on the gross profit from the resulting trading plus the value of any other advantages obtained (such as benefit from increased market share and cost savings).

An accountant might consider that the appropriate figure, instead of gross profit plus cost savings, should be the contribution which the trading in question makes to net profit, that is to say the relevant turnover net of associated variable costs.  That would be a better measure of what the business has gained by the additional sales.

Certainly in such cases a forensic accountant, such as myself, should be instructed to assist in quantifying the appropriate figure.

The key to differentiating the three situations is a careful analysis of the nature of the offence and the extent, if at all, to which it involves trading, or results in underlying trading, which is itself illegal.  Where the offence involves illegal trading, or results in trading which is itself illegal, then the benefit will be the gross amount received from that trading.

Where the offence does not involve trading but results in trading which itself is not illegal, then the expenses incurred in that trading are not expenses of the crime and may be treated, on grounds of proportionality, as consideration which may reduce the amount to be paid under the confiscation order.

Where the offence does not itself involve trading and the trading does not result from the offence, then that trading does not give rise to any benefit for confiscation purposes.

However there are undoubtedly some legal complexities inherent in this new approach particularly with regard to distinguishing, on the one hand, trading receipts from criminal activity and, on the other, trading receipts from legitimate activity resulting from criminal conduct.

It remains to be seen whether the Supreme Court will endorse this new approach when an appropriate case comes before it.

 

Contacting us

Our contact details are here.

David

(Note: This article applies to confiscation proceedings under the provisions of Part 2 of the Proceeds of Crime Act 2002 in England and Wales.  There are a number of additional issues which could be relevant to a defendant’s confiscation proceedings in particular cases which it is not possible to deal with in a relatively short article such as this.  Appropriate professional advice should be sought in each individual case.)